Convertibles retreat, healthcare issues hit hard, Tyco takes wild ride

By Ronda Fears

Nashville, Tenn., Jan. 18 - It was another wild ride for convertible players Friday, trader said, with healthcare issues and Tyco at center stage. Arbitrageurs were having a heyday on the volatility, and outright investors were searching for cover. Tyco recovered after announcing a conference with analysts next week immediately after the three-day weekend, but had a roller coaster session. On negative news from Elan and ImClone Systems, traders said there was heavy selling of all healthcare related issues.

"It was pretty sloppy today. Tyco was absolutely insane. The arb guys were loving it, this sort of situation really gets their blood pumping," said a convertible trader at a major investment bank in New York. "The stock was down to the low $40s at one point and the bonds were off a couple of points. The rumors just kept getting more and more outrageous, as they tend to do. But everything bounced back after the company announced the call next week."

Due to rampant market buzz over the past week that has been escalating each day, Tyco scheduled an analyst meeting at 9:30 am ET on Tuesday at The Plaza Hotel in New York City. The meeting will be simultaneously webcast at: investors.tycoint.com/medialist.cfm

"We are holding this meeting to respond to the continuing stream of baseless rumors that are depressing our stock, and to discuss ways in which we plan to enhance shareholder and debtholder value," Tyco said in a company statement

Tyco shares closed up $1.38 to $46.45. That boosted the zero-coupon converts (Baa1/A), with the 2020 issue up 0.625 points on the day to 71.625 bid, 72.125 offered and the 2021 issue up 0.25 to 72.5 bid, 73 offered.

Traders said heavy selling was taking place Friday as valuation concerns once again set in, but it was heaviest in the healthcare sectors because of the news from Elan and the seemingly worsened situation at ImClone.

ImClone said it received a letter of inquiry Friday from a congressional subcommittee requesting information pertaining to Erbitux, its investigational cancer drug being that was came up against a major obstacle at the Food and Drug Administration in late December. "The information requested is a result of the committee's concerns based on recent stories in the media concerning the company's receipt of a refusal to file letter for Erbitux as well as significant public information and media attention surrounding Erbitux," ImClone said in a company statement. "Specifically, the subcommittee has requested records in connection with the refusal to file letter, records relating to meetings between the FDA and the company concerning Erbitux, and records relating to the pivotal study. The company intends to cooperate fully in response to the inquiry." InClone also said it remains fully confident in Erbitux and looks forward to continuing its dialogue with the FDA regarding the potential approval of the drug.

But ImClone's securities suffered severely, traders said. The ImClone 5.5% convertibles due 2005 (NR) fell 13.75 points on the day to 75 bid, 75.875 offered while the stock plummeted $8.93 to $21.15.

"People right now have zero tolerance about anything to do with anything that seems like a disclosure issue," said a convertible trader at a hedge fund in Connecticut. "If there is a hint that maybe something wasn't disclosed, people are bailing out, and quick. The Enron fiasco has really given the market the jitters."

Elan Corp. plc was wounded after announcing jointly with Wyeth-Ayerst Laboratories, the pharmaceutical division of American Home Products Corp., late Thursday they decided to temporarily suspend the trial of an experimental Alzheimer's drug after four patients in France were reported to have clinical signs consistent with inflammation in the central nervous system.

Elan's zero-coupon converts due 2018 (Baa3/BBB-) fell 5 points on the day to 65.5 bid, 66 offered as the stock plunged $6.15 to $38.65.

Investors were looking for cover, traders said, but there was little shelter to be found. "We were picking some of the old standard lines to buy, like industrials," said a trader at a convertible fund in New York. Notably higher were SPX Corp., which makes industrial tools and products, and cigarette maker Vector Group. Both of SPX's zero-coupon convertibles (Ba3/BB-) were higher, with the February 2021 issue up 2 points to 72.875 bid and the May 2021 issue up 1.75 to 68.875 bid while the stock climbed $6.01 to $134.51. Vector's unrated 6.25% convert due 2008 added 2 points to 97 bid as the stock edged up 76c to $28.25.

The primary market took a break Friday, glad to have a three-day weekend to gear up for a busy week next week, what with the Ford deal and several others anticipated to come to market.

The new Charles River Labs deal freed to trade and was slightly higher, but traders said interest waned considerably on new paper because of the upcoming Ford deal. The Charles River Labs' 3.5% convert due 2022 edged up 0.125 point to 100.125 bid, 100.375 offered with the underlying stock unchanged at $29.90. Continental Airlines' 4.5% convert due 2007 slipped 0.25 point to 98 bid, 99 offered with the stock up 90c to $29.35. Adelphia's 7.5% mandatory edged up 0.125 to 26.375 bid, 26.5 offered as the stock closed off 3c to $26.02.

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